Amazing What You Learn When You Ski With Google

Posted: February 2, 2006 in Uncategorized
My wife and I took our daughter skiing for the first time yesterday.  Absolutely adorable! <says the very biased dad>  Was also my wife’s birthday so we had a wonderful family outing all the way around.
Even when all of Google showed up to ski!
Unbeknownst to us, our quick trip coincided with Google’s annual ski trip — yes, the entire company goes skiing — albeit in three "shifts" since there aren’t enough accommodations at Squaw Valley to handle the entire company at once these days.
I, of course, engaged as many folks as I could.  Here’s what I learned:
(1)  Everyone at Google snowboards.
(2)  Like all youth, Google employees remain — despite the earnings announcement — supremely confident.  (Ah, remember when we were invincible?  Hey, wait a minute, I still feel that way! <smile>)
(3)  Unlike other youth, Google employees have a sense of maturity and purpose… and a clear mission to change the status quo.
(4)  GOOG didn’t miss it’s numbers… well, at least using, uhm, fuzzy logic.  I haven’t been through all the reports yet, but according to a couple employees, if you factor in one-time charges (like establishing a $90 million charitable fund) and adjust for a bonehead tax rate goof, earnings would have been in the "$1.80’s".  (Even more amazing than GOOG actually beating its numbers is the fact that the rank & file employees know these details… stock stuff must be widely and intensely discussed by the watercooler, er, I mean Odwalla Juice fridge.)
My take?
Same as always.
Google will be a $20 billion company before anyone knows it… and, at about the same price/sales ratio as MSFT, that means GOOG should have a market cap of about $160 billion.
The $160 billion question, then:  When?
This quarter, Google’s revenue was almost $2 billion, about 86% growth… or an $8 billion run rate.
Let’s say GOOG rev slows to 50% next quarter.  That’s $3 billion next quarter… or a $12 billion run rate.
And let’s say GOOG rev slows to 33% the following quarter.  That’s $4 billion… or a $16 billion run rate.
And let’s say GOOG rev slows to 25% that very next quarter.  That’s $5 billion… or a $20 billion run rate.
What this suggests is that Google will be a $20 billion company well before the end of the decade… like in less than two years.
What’s my 24-month price target?  (Hey, everyone else gets to play GOOG lottery!):  $160 billion market cap divided into number of shares available, which keeps changing as more shares come on to the market.  At current share levels, though, this suggests a 24-month price target of $541.30.  Give or take.
[Royal Note:  This conclusion is correct but the calculation is — embarrassingly — incorrect.  See Feb 9th post for correct calculation.]

So, why the panic in the stock price yesterday?

Easy:  Dejection.  ("They missed!")  Confusion.  ("Did they miss?!")  Emotion.  ("Yes!  No!  Which one?!  Oh, shit!") 
Those things, plus the fact that shares really have gotten ahead of themselves. 
In truth, yesterday was a much needed event… a weird detente of sorts between warring factions.  Everyone got something: 
     Those rooting against the stock saw the significant drop they’ve wanted.
     Those rooting for the stock saw significant support in the face of an emotional sell-off for what can only be described — despite all rhetoric — as an outstanding quarter.
P.S.  By the way, I think GOOG’s performance means great things for both MSN and Yahoo, too.  We really are witnessing a total revolution — a coup d’ tate — of traditional media.  MSN and Yahoo are next in line to benefit.

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